Senior housing in the United States is being built at a record pace and demand is growing, but occupancy levels are still below normal levels due to the significant amount of supply added over the past few years.
During third quarter 2019, about 7,000 units were added to the senior housing sector, which is an annual pace of 28,000 units. This represents a nearly 3 percent increase in supply but is still a reduction from the torrid pace of inventory growth in 2018 of more than 31,000 units, according to NIC MAP data. Senior housing included in these statistics consists of independent living, assisted living and memory care.
Third quarter 2019 absorption was more than 8,500 units, the highest quarterly absorption seen in the past five years. With third quarter absorption exceeding new supply, overall senior housing occupancy rose 30 basis points to 88 percent. While this is a positive trend, the average occupancy is still well below the 92 percent to 95 percent occupancy level that is considered “normal” for the sector.
“2018 and 2019 have been the strongest pace of demand we’ve ever seen, even with the growth in inventory,” explains Lisa Strope, JLL’s director of research, healthcare, life sciences, and seniors housing.
AN AGING POPULATION
The United States is aging, and fast. The portion of the population aged 65 or older is expected to hit 20 percent by 2030, up from 15 percent today.
According to the U.S. Census Bureau’s 2017 national population projections, the over-65 population will nearly double to 88 million from today’s 50 million. With life expectancy creeping up to 76 for men and 81 for women, the impact will be felt across the economy, hitting hardest with its demands on healthcare and senior housing.
JLL expects there will need to be an unprecedented amount of senior housing to meet these demographic changes. But it is important to realize that the wave of baby boomers likely to reside in senior housing is still a few years away. Most residents of senior housing are age 75 or older at the time of entry, and the first of the boomers will not hit 75 until 2021. The baby boomer influence on senior housing demand is still in the nascent stage.
Developers have been responding to the forecasted growth in senior housing demand. At the end of 2018, U.S. senior housing was comprised of about 8,470 professionally managed communities with 1 million units. According to NIC Map, more than 31,000 new units were added to the senior housing inventory in 2018, roughly on par with the 32,000 units added in 2017.
2018 also saw 21,962 units absorbed on a net basis, not far off from the 22,219 units absorbed in 2017. The increase in inventory did trigger a 60 basis point drop in occupancy. The average senior housing property offers about 113 units and has an 88 percent occupancy rate.
The decline in occupancy over the past few years is due to supply being built faster than absorption. This has caused market saturation to occur in some markets, while others have remained stable. While the decline in overall occupancy has caused concern in the capital markets, the sector also saw 3 percent rent growth during 2018, and loan delinquencies remain low.
RESISTANT TO CYCLICAL FLUCTUATIONS
Senior housing encompasses multiple subsectors. Age-restricted apartments have no or relatively few amenities and can be more affordable. These properties, sometimes referred to as active adult apartments, are a rapidly emerging sector of the market. Such properties offer lower rents than full-service independent living and tend to attract a younger resident base, with average ages in the low 70s. But the depth of this market is still untested to a degree and performance metrics are not readily available.
The independent living, assisted living and memory care sectors are primarily private pay and demand is often based on need, especially for assisted living and memory care. Needs-based goods and services tend to be resilient in bad economic times and can also perform strongly in good economies.
The skilled nursing segment of the industry has very different dynamics with the vast majority of resident stays funded by Medicaid, Medicare or private insurance. While government funding can provide stable cash flows, the nursing sector is highly complex and highly regulated, and this causes many investors to shy away from it.
“All property types in this sector are seeing a lot of momentum, and since it’s a needs-based demand real estate product, it tends to be more countercyclical than other types,” says Strope.
Senior housing does have its challenges, especially because it relies heavily on talent acquisition and retention. Senior housing is a highly labor-intensive industry and the extremely tight U.S. job market is forcing operators to pay workers more, spend more resources on recruiting and manage through high employee turnover rates.
In the near term, an economic slowdown might even be beneficial for senior housing, as the labor market would cool a bit, easing those pressures on operators. But over the long term, labor will be a significant challenge for the industry as the shifting demographics of the country will see the population of persons 65 and older grow by 53 percent between 2020 and 2050, while the “working age” population (persons 18 to 64) will grow by only 11 percent.
However, the operational challenges still don’t outweigh the potential. Overall, senior housing remains a top product type that investors should remain focused on as the momentum in the space will only grow over time.
Charles Bissell is managing director in the senior housing capital markets group at JLL.